Industrial, Retail Paths Diverge as Strategies Shift

The industrial and retail sectors are on diverging paths, according to Lee & Associates’ 2023 Q4 North America Market Report. In the industrial space, slowing demand continues to jolt the market as US net absorption in 2023 dropped 61% to 164.8 million square feet from the previous year. Meanwhile, retail performed better than expected in 2023, with consumer spending and tenant demand pushing vacancy rates to record lows.

Jeffrey Rinkov, CEO of the broker-owned real estate services firm, says that industrial softness has landlords revising their retention strategies, and a strong consumer and new concepts have retail on an encouraging path.

Industrial Inventory Shifts Landlord Strategies

As industrial net absorption declined, a record 528.7 million square feet was delivered, further increasing the vacancy rate in the first half of 2024. “There’s a leveling of demand as the 2020 development cycles come to fruition,” says Rinkov. “We are now dividing up significantly larger inventories, which has an upward effect on vacancy rates.”

Nationally, more than 450 million square feet are under construction, yet most remain unleased, in stark contrast to previous years, says Rinkov. The West Coast markets were hit hardest: Seattle, Los Angeles and the Inland Empire all had outsized increases in space available for lease, but may gain stability from the new dockworkers contract. Elsewhere, Texas and Florida bucked national trends with tightening availability rates, likely due in part to the diversion of Asian imports to East and Gulf Coast ports as well as rapid in-migration.

“Pre-pandemic, new industrial buildings were either pre-leased, pre-committed or had multiple offers. That kind of demand is nonexistent today.” However, Rinkov believes that demand for new, state-of-the-art industrial buildings is going to strengthen.

Rinkov notes that landlords are evolving their leasing strategies, including adopting rental abatement periods and tenant improvement allowances, as the balance of power has shifted. “Previously, the landlord had control. But higher vacancy rates and related net-absorption figures are empowering tenants.”

Retail Surprises, New Trends Emerge

Conversely, quality retail space was more difficult to find, as its vacancy rate fell to a record low of 4%. Additionally, the annual rent growth was 3.3%, significantly higher than the 2.3% average over the past decade.

“Retail’s surprising performance reflects the strength and resilience of the consumer,” says Rinkov. “As employment levels and wages grew, consumers rebounded and began embracing more travel and hospitality experiences,” he notes. All of which helped the retail market claw back previous tenant losses.

Sun Belt states saw an uptick in retail space caused by increased population and buying power. Rinkov adds that as companies return to offices, it’s spurring current and new retail space, including “city center” concepts are emerging with more luxury stores, transportation centers paired with hospitality and related retail tenants.

The trend is evident as general retail space leases and space in neighborhood centers account for about 90% of current net absorption. Leasing is dominated by spaces of 3,000 square feet or less, driven by growth from quick-service restaurants.

Rinkov notes that the two sectors remain linked, with industrial potentially benefiting from the retail’s success. “There isn’t an exact historical comparison for what the industrial sector is experiencing,” but he remains bullish on its future. “Retail’s performance is the true bright spot for 2023.”